Recent posts from two thought-leading venture capitalists give insights into how VCs approach the impact of a possible recession. The first is from Will Price, a managing director at venture capital firm Hummer Winblad. In his post, titled "Downturn – Now What?" (hat tip: Ask The VC blog), Will offers some very interesting observations, including this one:
If I take the last downturn as my guide, I can say with confidence that venture investors would be well suited to continue to invest right through the downturn – in 2002 and 2003 terrific companies were formed and funded at very reasonable valuations and with business models that reflected the demand for capital efficiency and economic viability.
The second post comes from Jason Mendelson who, together with fellow Foundry Group managing director Brad Feld, publish the Ask The VC blog. This new post, titled "What Is The Effect Of The ‘Pending’ Recession On Venture Capital Financings Of Private Companies?," examines similar issues. Jason makes a number of thoughtful comments, including:
Now how does this all affect VC financings? Well, history would tell us that VCs will put less money into funding companies, converse cash and wait until the acquisition and public markets open up a bit. With a lack of good exits, why would a VC want to invest in a company? However, that’s never made much sense to me, especially if we limit investments to early-staged companies. I’ve always thought the best time to invest in young startups is when things are choppy. You usually can invest at lower prices, hire folks for less than you normally would, etc. Also, I’d never expect an investment to exit in the near future (1-3 years, for sure) and therefore the company will be well positioned to exit at the end of the recession. If you wait until the recession is over, you are already paying too much.
For anyone interested in how a recession could impact venture-backed companies, including insolvency professionals who work with the ones that fail, these new posts from two leading venture capitalists make for very informative reading.